Five years ago today I was hard at work revising all of my prior efforts on Bailout Nation.

Once Lehman hit the pavement after Bear was rescued, it was clear there were lessons to be learned. Here was my short list:

The Terrible Lessons of Bear Stearns

Go Big: Don’t just risk your company, risk the entire world of Finance. Modest incompetence is insufficient — if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system. The fear and disruption caused by a Bear collapse is why it was saved. (AIG has the right idea on this)

If you cant Go Big, Go First: Had Lehman collapsed before Bear, then the same fear and loathing of the impact to the system might have worked to their advantage. But having been through this once before, the sting is somewhat lessened — especially for a smaller, lets interconnected firm like LEH. (First mover advantage!)

Threaten your counter-parties: Bear Stearns had about 9 trillion in its derivatives book, of which 40% was held by JPMorgan (JPM). Some people have argued that the Bear bailout was actually a preventative rescue of JPMorgan. Its a good strategy if your goal is a bailout — risk bringing down someone much bigger than yourself.

Risk an important part of the economy: If your book of derivatives is limited to some obscure and irrelevant portion of the economy, you will not get saved. On the other hand, if Mortgages are important, credit cards and auto loans are too. Securitized widget inventory is not. To use a dirty word, Lehman’s exposure is “contained.”

Balance Sheets Matter: Focus on the media, complain about short sellers, obsess about PR. These are the hallmarks of a failing strategy — and a grand waste of time. Why? Its call insolvency. ALL THAT MATTERS IS THE FIRMS’ BALANCE SHEET. Lehman’s liabilities exceed its assets, and they are now toast. Merrill Lynch got a lot of the junk off of its books, and got a takeover at 70% premium to its closing price. And Credit Suisse, who dumped much of its bad paper many quarters ago, is in a better tactical position than most of its peers.

Unintended Consequences lurk everywhere: When the Fed opened up the liquidity spigots via its alphabet soup of lending facilities, the fear was of the inflationary impacts. But the bigger issue should have been Complacency. The Dick Fulds of the world said after Bear, these new facilities “put the liquidity issue to rest.” Lehman got complacent once liquidity was no longer an issue — perhaps they acted to slowly to resolve their insolvency issue in time.

The piece excerpted above started as a blog post, than was expanded, than finally became a short chapter. Its even more true today than 5 years ago . . .


The Terrible Lessons of Bear Stearns  (September 15th, 2008)


Category: Bailout Nation, Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “The Terrible Lessons of Bear Stearns, Lehman Edition”

  1. 873450 says:

    In Euro-land it seems Greece read the chapter, learned the lessons and followed the advice.

    • willid3 says:

      except that their problems pre dated 2008. just wasnt noticed (or ignored). then you could say the same about wall streets problems too

  2. VennData says:

    That clown Thain was on CNBC complaining about uncertain tax rates, regulations, etc. Saying they are holding the economy because “we are only back to where we were.”

    Ever think where we were in 2006 was a Bush-and-GOP-controlled Congress finance-induced RE bubble?

    So the retread Thain implies that was sustainable? Hmm. Well we have data point that says it wasn’t.

    • rd says:

      Thain is absolutely right. The financial sector only had problems in 2007-2009 due to temporary irrational market pricing that only made it look like the financial firms were insolvent. In reality, they were fine as long as the temporary irrational market pricing of their securities was ignored. Now since the financial sector always acts only rationally and the markets are always efficient, then they didn’t need to have all that regulation stuff because they could rationally ignore the irrational pricing so everything would be fine if they were just left alone. If only they could get the politicians to act as rationally as they do.

  3. [...] Barry revisits the "Terrible Lessons" of Bear Stearns and Lehman on the fifth anniversary of the crisis.  (TBP) [...]